Five Reasons to Sell, Sell, Sell

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4. Subprime and housing

O.K., here's the really scary one. Many on Wall Street believe the problem with subprime mortgages is limited and under control. They may be right, but it's impossible for anyone to predict how many debtors will ultimately default on their obligations. Many home buyers used creative financing to buy expensive houses in the years of booming home prices. "It's a tough one to get a handle on because we're not really sure what's truly at risk," Scott says. "It could spring on us suddenly."

What other forms of risky credit threaten debt markets beyond subprime? Bill Larkin, portfolio manager of fixed income at Cabot Money Management, believes he's already seeing signs that subprime worries are spreading, rocking other areas of the credit market. He sees a "flight to quality," with many bond investors fleeing not just subprime but anything with a hint of risk.

If the trend accelerates, it becomes even tougher for home buyers to get mortgages, pushing home prices lower. It also becomes more expensive for companies and hedge funds to borrow. That could cut off the flow of money into stock buybacks, mergers, and acquisitions, especially the private equity buyouts that have fueled the bull market. "Just like raising rates, this acts as an economic brake," Larkin says.

"People are starting to get nervous," Larkin adds, but it takes a while for these trends to show up. "It doesn't just—boom—happen." Are there lots of other forms of bad debt out there? Are lenders—as Larkin jokes, "using their garage door as collateral?" No one knows. "That's where the risk is," he says. "There's not a lot of transparency here."

Pimco bond guru Bill Gross has warned investors not to think subprime is only a problem for a few hedge funds or investment banks. The problem affects millions of home buyers who financed their houses with cheap money but are now seeing mortgage payments rise along with defaults. Gross wrote in his July investment outlook, "This problem—aided and abetted by Wall Street—ultimately resides in America's heartland, with millions and millions of overpriced homes and asset-backed collateral with a different address—Main Street."

5. Shiny happy investors

As markets rise, the bulls' success may be their biggest weakness. Too much optimism can derail a rally as quickly as too much gloom and doom.

It's a cliché on Wall Street that markets like to climb a "wall of worry." The more doubts about a rally, the more headwinds it faces on the way up, the more likely a bull market has a firm foundation. "We like to see some pessimism in the market," Schaeffer's Sparks says. Concerns about interest rates, terrorism, gas prices, or inflation? "Those are the bricks in the wall of worry."

Despite the index's record-breaking pace recently, experts like Sparks still see signs of skepticism. To gauge this, investors can look at the amount of short-selling—trades betting stock prices will fall—or ratios between puts and calls.

Sparks also keeps an eye on the media, including articles like this. Be on the lookout for articles proclaiming "happy days are here again," Sparks says. If the media is sounding too positive about stocks, it may be a sign that retail investors are jumping into the market. And if the average investor is buying again, you can bet the "smart money" is selling, and stock prices are near peak levels.

For another look at whether the bear is on the bull market's heels, see BusinessWeek's slide show.

Steverman is a reporter for BusinessWeek's Investing channel.